When you buy a stock, you’re investing in a business. You’re becoming an owner of that business. Amid the excitement and glamour of the stock market, however, we often forget this basic fact. And that can have big consequences for investment success.
Imagine that, after some early working years in employment, you decide to quit your job and re-join the family business that your grandparents built and which your parents now run. In order to do so, you have to buy into the business by purchasing a stake and becoming an owner. As an owner of this business, are you keeping an eye on the near-term prospects of the company, with a view to selling your stake if the outlook looks challenging? Perhaps you’re expecting a difficult summer, so you plan to sell your stake in the company now, and reinvest when things are looking peachier later this year?
We thought not. It sounds ludicrous, and it is. It may seem like an extreme example, but trading in and out of ownership of a stock is really no different. The only reason it seems more normal is that the logistics of doing it are made so much easier with standardised transfer-of-ownership contracts and low transaction fees. Trading in and out of your family business would be a logistical nightmare.
But that logistical nightmare is a blessing in disguise. Holding a stock for an extended period of time is beneficial for the owner (you), other owners (other shareholders) and the company itself. And what’s good for the company is good for you, because you own it. Over time, the compounding of returns from investing in the stock leads to much more fruitful and reliable investment results than trying to trade in and out over shorter periods.
When you buy a stock, you’re becoming an owner of a business. Don’t think of yourself as a ‘trader’, and perhaps not even as an ‘investor’, but as an ‘owner’.
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